Vietnam risks early monetary policy loosening, World Bank says

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Vietnam's restructuring of its debt- burdened banks is slower than anticipated, and the nation faces the risk of premature monetary loosening that can trigger inflationary pressures, the World Bank said.

The country lacks consistent information on non-performing loans and has no decision on a plan to solve them, the World Bank said in a document released in Hanoi on Wednesday. The asset quality of its credit institutions is worsening, with foreign exchange reserves also at a "low level," the lender said.

Vietnam's banking industry is struggling with bad debts, which the head of a National Assembly economic committee said may have accounted for 8.8 percent of outstanding loans at the end of September. That has made banks reluctant to lend, crimping corporate growth and domestic spending, and dragging the economy to its slowest pace of expansion in 13 years.

"There are many downside risks in the economy," Deepak Mishra, World Bank's lead economist for Vietnam, said at a briefing in Hanoi Wednesday. "Core inflation is still very high, premature loosening of monetary policy can prompt a resurgence of inflation, and the level of foreign exchange reserves is low by international norms."

The State Bank of Vietnam has held its refinancing rate at 10 percent since July, after cutting it from 15 percent at the start of the year. It has kept its repurchase rate at 8 percent since June, after lowering it from 14 percent in the same period.

Accelerating inflation

While Prime Minister Nguyen Tan Dung has pledged to bring inflation down to a decade low, consumer prices quickened to a six-month high in November. The rate may accelerate toward the end of the year as the government encourages banks to cut lending rates and help businesses, Do Thi Nhung, deputy head of the central bank's monetary policy department, said on Nov. 5.

The government expects the economy may grow 5.2 percent this year, which would be the slowest pace since 1999. Export gains have helped buttress foreign-exchange reserves, which Dung said may reach the equivalent of about 12 weeks of imports by the end of the year. Still, they are at a low level, said the World Bank, which estimates them to be at 2.3 months of imports.

Moody's Investors Service cut the country's credit rating in September, citing "more pronounced weaknesses in the banking system" and "looming costs" related to recapitalizing banks.

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